In the context of banking, what is meant by "impaired loans"?

Impaired loans refer specifically to loans where it is probable that the lender will not be able to collect all amounts due according to the contractual terms of the loan agreement. This situation typically arises when a borrower is in default or is experiencing financial difficulty, making it unlikely they can repay the loan fully.

In the context of banking, recognizing loans as impaired is crucial for accurate financial statements and risk management. Banks must assess the collectibility of loans and adjust their allowance for loan losses accordingly. This ensures that the financial statements reflect the potential losses from these loans and helps maintain the overall health of the financial institution.

The other options do not accurately reflect the technical definition of impaired loans; they may refer to other scenarios not related to the likelihood of collection under the original loan terms. For example, loans that are fully secured do not imply impairment because they have collateral backing. Loans with lower interest rates or delayed payments may not necessarily indicate a problem with collectibility. Thus, the most fitting definition correlates directly to the situation of borrower default leading to an inability to collect.